Foreign Investment Screening: Revised Rules for Investing in Strategic Sectors
Author: Jera Majzelj
After three years of application, the temporary foreign direct investment screening mechanism has been replaced by a new, more permanent arrangement. The legislator introduced the new mechanism in the Investment Promotion Act.
The original mechanism was introduced in 2020 as part of the intervention measures in relation to COVID-19 epidemic. Namely, the European Commission had been encouraging Member States to use all available tools to prevent the loss of critical assets and technology, particularly in the health and pharmaceutical sectors. Foreign investors in certain sectors were thus obliged to notify their investments in Slovenia to the Ministry of Economy.
The new rules retain the essential features of the original mechanism and introduce some welcome changes, including:
- the obligation to notify a foreign investment no longer applies to investors from EU Member States, but only to investors from third countries;
- acquisitions of real estate are no longer subject to notification;
- the time period during which the Ministry has the possibility to screen has been shortened from 5 to 2 years in some cases;
- the Ministry will always close the screening procedure by issuing a decision, whereas under the previous regime it had the possibility to close the procedure by issuing an opinion only.
Unfortunately, due to the rush to adopt the new rules, the legislator did not take the opportunity to eliminate a number of other dilemmas that have arisen in practice over the past three years and that create uncertainty for foreign investors and an additional bureaucratic obstacle to investing in the Slovenian economy.
Main Features of the Foreign Investment Screening Mechanism
Definition of a Foreign Investor
The most significant substantive change brought about by the new mechanism is the narrowing of the definition of a foreign investor. The notification obligation no longer applies to investors from EU Member States, but only to investors from third countries.
The new arrangement also explicitly addresses the issue of indirect investments, emphasizing in several places that the mechanism also applies to indirect links or acquisitions (e.g. an investment in a Slovenian company made by a third-country national through a company established in an EU Member State).
Definition of Foreign Direct Investment
The definition of foreign direct investment has remained almost the same – it covers any investment by a foreign investor aimed at establishing or maintaining lasting links between the foreign investor and a company established in Slovenia, by acquiring at least 10% of the capital or voting rights.
Two clarifications have been added compared to the temporary mechanism:
- the definition also explicitly mentions indirect links or indirect acquisitions;
- the definition explicitly addresses the issue of subsequent acquisitions – the first as well as every subsequent acquisition of a 10% participation is deemed a foreign direct investment.
It remains unclear whether a foreign direct investment can also be in the form of establishing a branch (the wording of the law would suggest not).
Despite the explicit reference to indirect investment, the practical approach to understanding indirect participation remains an open question. The supporting materials to the draft Act suggest that the Ministry’s approach will be purely mathematical (ownership of 60% of shares in a company that owns a 15% stake in a Slovenian company implies 9% indirect ownership (60% in 15% = 9%)). However, this approach disregards the substantive dimension of transactions. In most cases, majority participation implies control over the company, and this could lead to different (not so mathematical) conclusions.
The Act does not provide any exceptions for intra-group transfers, which is also confirmed by the supporting materials. This continues to represent an unnecessary administrative burden for foreign investors, since the ultimate ownership does not change with intra-group transfers.
The deadline for the notification remains 15 calendar days.
The new mechanism only affects the way the deadline is calculated. The temporary mechanism linked the deadline to the publication of a takeover bid or the conclusion of a merger agreement, which caused a lot of confusion. Namely, with this wording the notification obligation was (unintentionally) only applied to mergers of companies and acquisitions under the takeover legislation, while leaving out the much more common acquisitions of shares and business shares.
The new rules corrected this inconsistency and link the deadline to the conclusion of a legal transaction by which the foreign investor acquires 10% participation or to the publication of the takeover bid. In the case of establishment of a new company, the new rules link the deadline to the registration of the company establishment with the court register (previously, the deadline was linked to establishment itself).
Same as under the previous rules, the investor is not obliged to wait until for the final decision of the Ministry to carry out the legal transaction or to establish the company. However, by not doing so, the investor assumes a certain risk. If the investment is later prohibited by the Ministry, the investor is obliged to comply with such a decision and ultimately to dispose of the acquired investment.
Content of Notification
The new mechanism no longer provides for a notification form (which anyway had not come to life under the previous regime), but only sets out a list of information and supporting documents to be submitted by the notifying party. The list is identical to the previous one (annual turnover, number of employees, ownership structure, value and sources of financing, products and activities, etc.), except for two essential points:
- the investor must take a view on whether its investment has an impact on security or public order, which includes an assessment of certain criteria as listed in the Act (more on this below);
- the investor must provide supporting documents to prove the veracity of the information provided, which will be an additional administrative burden and cost for foreign investors, mainly due to translations into Slovenian.
Activities Covered by Screening
Not all foreign investments are subject to the screening, but only certain strategic sectors. The list of relevant activities under the new regime remains almost identical, and includes, amongst others:
- critical infrastructure, including infrastructure in the field of energy, transport, water, health, etc.;
- critical technologies and dual-use goods, including artificial intelligence, aerospace industry, etc.;
- supply of critical inputs and food security;
- access to, or the ability to control, sensitive information, including personal data;
- freedom and pluralism of the media;
- projects and programs of EU interest (e.g. Copernicus, Horizon).
The only change in the list concerns health and pharmaceuticals. Without explanation, the new rules have excluded health, medical and pharmaceutical technology and medical and protective equipment. These activities were previously explicitly mentioned and constituted, at the time of an epidemic, one of the essential purposes of the mechanism. The new list no longer mentions these activities explicitly, but the question remains whether they can still be considered as »critical technologies« or »critical resources« in general.
The interpretation on the scope of these activities also remains open, e.g. the Act does not define what is considered critical infrastructure, and the Ministry’s practice shows that the Ministry does not follow the definitions of sectoral laws (e.g. the Critical Infrastructure Act).
The screening process will be executed in a similar manner as under the previous mechanism, namely in two phases. The main difference is that the Ministry will in any case conclude the procedure by issuing a formal decision, whereas in the previous procedures investors had to settled for an »opinion« of the commission, the validity and finality of which were questionable.
In the preliminary procedure, the Notification Committee will first examine the formal conditions, i.e. whether the notified transaction or the establishment of a new company is subject to the provisions of the Act at all. For example, if the Commission finds that the investor is not considered a foreign investor as defined in the Act, the Commission will issue an opinion and the Ministry will issue a decision on this basis.
If the Notification Committee finds that the formal conditions for screening have been met, but the notified investment has no or only a negligible impact on security and public order in the Republic of Slovenia, the Committee will also conclude its work with an opinion and the Ministry will issue a decision to that effect.
If, during the substantive examination, the Commission finds that the investment may have an impact on public policy or security, it issues an opinion proposing the initiation of the second stage, the so-called screening procedure. On this basis, the Ministry will issue a procedural decision initiating the screening.
The substantive assessment of the investment and the foreign investor in this second phase is carried out by an expert group, which is appointed for each individual screening. The result of the screening is the opinion of the expert group, in which the expert group recommends that the Ministry either approves the investment, approves the investment with conditions for its implementation, or prohibits the investment if it may affect the security or public order of the Republic of Slovenia. Based on the opinion, the Ministry issues a decision.
Conditions on implementation may be attached to an investment where, although an impact on public order or safety is identified, this impact can be mitigated or even avoided. The set of conditions that the Ministry may impose is not limited. However, their duration is limited to a maximum of ten years. Failure to comply with the conditions may, under the new rules, result in a definitive prohibition on the investment.
If the screening shows that the investment has an impact on safety or public order that cannot be mitigated or avoided by setting conditions, the Ministry will prohibit the investment.
In the previous mechanism, the Ministry had to issue a decision no later than two months after the notification. Under the new rules, this deadline is unreasonably prolonged.
If the Ministry decides to launch a screening procedure, i.e. to start the second phase, the expert group has 2 years (!) following the conclusion of the legal transaction (or the entry of the new company in the court register) to prepare its opinion. The Ministry then has additional 2 months to issue a decision based on the opinion.
An even bigger problem may be the fact that the Act does not provide for a specific time limit within which the Notification Committee must carry out its preliminary assessment and within which the Ministry then decides whether to propose to initiate a screening procedure at all.
Most foreign investors expect their investment to be approved in the first phase, and their expectations have been confirmed by the Ministry’s practice so far. It is reasonable to expect that cases where a foreign investment could have a real impact on security or public order will be very rare. It is therefore very important that the Ministry carries out the preliminary assessment quickly. The new rules give investors no guarantee that this assessment will be carried out in less than two years. It follows from the supporting materials submitted in the legislative procedure that the legislator intended the Ministry to comply with the general 2-month time limit laid down in the General Administrative Procedure Act. However, the Investment Promotion Act does not explicitly provide for its application and it could be questionable whether the 2-year time limit explicitly mentioned by the mechanism overrides the general rule. Consequently, it will be very important that in practice the Notification Commission actually carries out its work within 2 months.
Extraordinary Screening Options
The Act also allows the Ministry, in exceptional cases, to initiate a screening on its own initiative and to carry it out within a longer timeframe.
If, within two years of the conclusion of the legal transaction or the entry of the company in the court register, the Ministry obtains new information that could affect the assessment (e.g. that the investor is engaged in illegal activities), it may initiate the screening procedure itself. In such a case, the expert group must issue its opinion within two years following the initiation of the procedure. This option is available to the Ministry even if it has previously granted an approval. The decision already issued is then annulled and a new decision is issued by the Ministry.
The Ministry is not limited to any predefined criteria when determining whether an investment may affect security or public order. The Act merely lists six criteria by way of example. Three of these are the same as before:
- the investor is under the control of a foreign government;
- the investor has already been involved in activities affecting public policy and security in an EU Member State;
- there is a serious risk that the foreign investor is engaged in illegal or criminal activities.
The new arrangement has added three more:
- following the notified transaction, the foreign investor would have exceeded the takeover threshold (1/3 of voting rights) or would have acquired, following a successful takeover bid, a 10% share of voting rights or at least a 75% share of the total voting shares of the target company;
- the foreign investor has a market share of at least 20% in the field of critical activities in Slovenia through the target Slovenian company;
- the foreign investor has achieved a 25 % or 50 % participation in the target Slovenian company.
The fines for breach remain the same under the new regime, but the scope of conduct that constitutes a breach is broadened. Whereas the previous rules provided for a fine only for breach of the notification obligation, the new rules provide for the same fine also in case of incomplete notification, failure to comply with the conditions for the investment determined by the Ministry and breach of the reporting obligation.
The fine for medium-sized and large companies can range from €200,000 to €500,000, and for other companies from €100,000 to €250,000. Independent entrepreneur is liable to a fine of €50,000 to €150,000, and a natural person to a fine of €1,000 to €5,000. The responsible person of a legal person or entrepreneur is liable to a fine of €2,000 to €10,000.
 REGULATION (EU) 2019/452 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union.
 The new rules still do not clarify whether the deadline is linked to the actual acquisition of title to the participation or to any conclusion of a contract in this respect. In fact, parties often first enter into a agreement in which they agree to a future transfer of shares, while the actual transfer is only carried out later. The wording of the Act suggests that the deadline runs from the disposal of the capital or rights, i.e. from the actual transfer, although the Ministry’s past practice suggests that the Ministry interprets the deadline differently.
 The Act lists, by way of example, certain restrictions, e.g. a prohibition on the sale of copyright or assets, prohibition on cooperation with a certain person, obligation to keep parts of the target company in Slovenia, prohibition on certain practices, obligation to provide goods, etc.
 Since the new regime (like the previous one) does not prohibit the implementation of a transaction before the Ministry has taken a final decision, the prohibition may be imposed too late, after the investment has already been carried out. As a consequence, the Act explicitly clarifies that the Ministry may, in the decision, order measures to prevent the investment from having an unacceptable impact, in particular the divestment of the acquired shares.